What the Owners Paid

Is it right or fair to take into account what a seller paid for their property when considering an offer?

Background

I looked at a property over the weekend, and the sales price was just reduced from $850K to $700K. Its not a bad deal, but not a steal either. I certainly wouldn't steer a client away from it because of the price. The current owner clearly updated nearly everything in the main house (its a small farm).

She had told me she gutted the entire structure and that everything was new from the flooring to the drywall to the kitchen, etc. From the outside it looks very dated, but once you are inside it is gorgeous and modern. So I clearly believe she had to have spent anywhere from $50K to $70K in fixing it up.

Now, when considering the offer - I always tell my buyers what the sellers paid for the property and when. Especially if it has been in the last 10 years or so.

On this particular property the owner bought it for $600K in 2004. Clearly, she bought at near the height of the market and is now selling at the low end of the market. She's selling because she's getting married and her future husband lives out of the area.

Fair Market Value

On some properties (townhouses, condos, etc.) you know what the price is based on recent sales. I mean, you're going to be within a few thousand of what sold last week in the same development. Especially in today's more stable market.

On single-family homes, you're going to have a little more fluctuation because of differences in models, features, lots, etc - but you're still going to be within a $20K to $50K range - depending on the neighborhood.

On larger properties (farms, large lots where acreage can vary, number of outbuildings, etc.) - you're probably looking at a spread of around $100K to $150K top to bottom.

At almost 3 acres the land alone is probably worth about $400K based in part on its zoning, and there are two residences and a very large pole barn on the property.

Taking that into account - this house is priced fairly. It would certainly be a steal at anything below $600K and it obviously was overpriced at $800K because it wasn't able to sell.

Now here's the deal.

Right now, the owner will takeaway around $100K if someone paid full-offer with no closing help. After she pays her closing costs and real estate commission, she'll probably just break even on all the money she paid for upgrades.

So maybe the $700K is a fair price.

But, would the price be fair if we learned she only paid $500K or even $200K in 2004? Or would we try to offer her an even lower price?

So when you make an offer, how much do you take into account what and when the owner paid for the property?

Vinny, It crtainly has no bearing on current market value BUT it may very well help my buyer to put together an offer that will be acceptable. Especially if the seller is in a distressed situation. So in my opinion it is valuable information.

I agree with previous posts. The sellers previous purchase price is good to know but current comps determine the offering price. What matters is similar homes sold in this neighborhood or if they are not available then comps from a similar neighbor.

Unfortunately the market determines the worth. If everything around comps lower than her farm, no one in their right mind is going to pay (xxxxx) regardless of the upgrades. She might have to take it as a loss.

I take it into account when I know the seller is upside down or close to upside down because I know we'll have a hard time negotiating in things like costs, warranties, and such.

I take it into account when it's obviously a flip because I know the appraiser is going to question every little thing about it, particularly if it was purchased only 6 months ago. That way I can be ahead of the game and already have the 2nd appraisal ordered.

Otherwise, I just use it as a gauge as to how negotiable they may be and tell the buyer that so they can make a better decision on where they want to start their offer.

But it doesn't affect market value. We just put an offer on one that we put in at market value for the 12 other homes we saw similar to it. But the seller owes 4k more than that on it. So who knows where that will end up.

Oh, ok... so the buyer gets to dictate the owners home equity. Gosh gees, hmm ... so what you are telling me is if the buyer just won the lotto, then they should pay full price. you know ! I'd have to sleep on that one. I'll give you my answer in the mornin.

I don't traditionally give any thought to what the current owner has paid for the house. It has no bearing on what the property is worth in the current market. I have recently taken the price that the current owner has paid for the house in recent cases only to try and determine how close to a short sale situation I am getting myself into. Take care, Jon

It is my opinion that what the seller paid previously has no bearing on what I am counseling my buyers to offer. If they bought high, it's sad. What they walk with, or without is no concern of mine. My job is to get my clients the best deal I can get them, regardless of the sellers costs. (wow, that sounds so cold, doesn't it?). While I do feel so sorry for many sellers right now, I have to keep my emotions out of it.

Vinny: The price the seller paid for the property has nothing to do with FAIR MARKET VALUE. I have had buyers say "Well the seller only paid $______ for the home" I agree the buyer needs a good deal although the buyer will want to make a profit when they sell too.... RIGHT ?

Obviously the price paid for any property 3-4 years ago has nothing to do with it's current market value. It may have an impact on what the seller is willing or able to accept, which also has nothing to do with the current market value.

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